Global regulators set out climate checklist for banks

Global regulators recently published a detailed checklist for banks to assess how climate change affects all aspects of their business, including pay and capital, as economies set carbon reduction targets. International banks like Goldman Sachs, Deutsche Bank and HSBC will be expected to examine whether they are quantifying risks from climate change properly despite sometimes patchy data and time horizons that go well beyond traditional risk assessments and remuneration packages.

The guidance is the latest effort by the Basel Committee, made up of regulators from the United States, Europe, Japan, China and elsewhere, to review how their rulebook covers climate change in a sector at the forefront of efforts to transition to a net zero economy.

Banks must look at how risks from climate change affect their business strategy, training of senior staff and board members, internal controls, capital and pay over the short, medium and longer term, the guidance showed. “The board and senior management should consider whether the incorporation of material climate-related financial risks into the bank’s overall business strategy and risk management frameworks may warrant changes to its compensation policies,” Basel said.

“Banks should identify, monitor and manage all climate-related financial risks that could materially impair their financial condition, including their capital resources and liquidity positions.” Members of the committee, which include regulators from the United States, Europe, China and Japan, are expected to apply the new guidance as soon as possible, and Basel will monitor compliance. Regulators say few if any banks have been making such detailed and comprehensive assessments of climate risks.